Investing is a bit of a balancing act - juggling the risk of investing against the returns you're hoping for. The higher the return, the higher the risk. The lower the return, the lower the risk.
The asset classes
Cash, fixed interest, property and equities make up the traditional asset classes available and each asset class has its own risk and reward structure. More recently, alternative assets are making their way into portfolios and can help reduce overall portfolio risk depending on the type of asset. This is because most alternative strategies have a lower correlation with the traditional asset classes.
Arguably, one of the most important decisions you will make about investing is how much to allocate between the asset classes – referred to as asset allocation – and your choice can influence the long-term returns and risk of your portfolio. Therefore, it is important you understand the nature of each asset class before investing.
How you feel about risk and how long you want to invest will help determine how much to invest in the different asset classes. For example, younger investors who have the time to invest may want to invest a greater portion of savings into growth-type assets whereas those closer to retirement may want to reduce risk and consider income-type assets or focus on total return.
Your personal situation - Ask yourself
- How much money do I have available to invest?
- What do I want to achieve from my investment?
- How long am I investing for?
- What risks am I prepared to take to achieve this?
- What are my expectations of returns from my investment?
- Am I looking for tax savings from my investments?
- What other investments do I have that should be considered as part of my overall strategy?
When starting out with investing it is always recommended you try to not time the market. History has shown investors can actually lose by doing this. As they say, you have to be in it to win it. Diversifying across all asset sectors is the best way to minimise risk over the long term.
Investing amounts regularly over a period of time is also a great strategy, and much better than trying to time the market. It allows you to take advantage of dollar-cost averaging which is simply investing in additional shares or units in an existing investment over time. You get more bang for your buck this way.
Investing is a balancing act. But if you arm yourself with the right information and seek the right advice so that your portfolio suits your personal goals for investing, you have a greater chance of success.
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